Employer Liability in the Administration of Benefit Plans

October 10, 2012

Article By: Elizabeth Forster

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Employers are facing increasing claims as a result of their failure to provide employee benefits and/or their negligence in the handling of benefit issues.

Summarized below are some of the areas where liability may arise.

1. Obligation to Extend Benefit Coverage Upon Termination of Employment

Absent an express term to the contrary, most contracts of employment contain an implied provision that they can only be terminated for just cause or, upon reasonable notice. The amount of reasonable notice that must be given varies from employee to employee as it is based upon factors which affect the employee's ability to find comparable employment such as the employee's age, length of service, level of responsibility and salary. (See Bardal v. The Globe & Mail, [1960] OWN 253).

If an employer fails to provide reasonable notice of termination, it is liable to an employee for all damages suffered as a result of that failure. Normally these damages are the value of the employee's lost salary and benefits during the notice period less the amount that the employee earns through alternative employment.

In addition, employees are entitled to a minimum statutory notice period under the Employment Standards Act, 2000. Under the Act employers are required to provide a minimum period of salary continuance and benefit coverage. During this minimum notice period, employees are “deemed” to be in the active employ of their employer for the purposes of interpreting the policy of insurance and establishing eligibility for coverage by virtue of Subsection 62(1) of the Act.

Some employee benefits may not be continued after the expiration of the statutory notice period because, by their terms, they are available only to employees in the active employ of the company. The most common example of this type of insurance is long term disability.

Normally employers and employees negotiate severance packages at the time of termination. In these severance packages, it is clearly stated that certain benefits will not be continued during the notice period. In exchange for the severance package, employees are usually required to sign a release. In this way, the employer is protected from any further liability should the employee have a claim under one of these discontinued benefit plans.

However, situations do occur where the parties are not able to successfully negotiate a severance package. In these cases, the employee normally sues for damages for wrongful dismissal and claims all salary and benefits he/she would have received had he/she been given reasonable notice. If the employee becomes disabled during the notice period, his/her claim for damages would include a claim for all disability benefits he/she would have received had he/she been given reasonable notice. In cases of catastrophic disabilities these damages can be enormous.

For example, in Prince et al. v. The T. Eaton Co. Ltd. (1990), 32 C.C.E.L. 174 (B.C.S.C.) the plaintiff became disabled after termination and the cancellation of his group long term disability coverage. However, as the disability occurred during the reasonable notice period, the trial judge allowed the plaintiff's claim against his employer for the disability benefits he would have received but for the cancellation of the insurance coverage. The trial judge held at page 185:

If there is no overriding express provision, the contract of employment is taken to contain an implied term that each party must give reasonable notice of termination to the other. The implied term is not a term to the effect that the employer may give pay in lieu of notice: see Dunlop v. British Columbia Hydro & Power Authority (1988), 23 C.C.E.L. 96, [1989] 2 W.W.R. 518, 32 B.C.L.R. (2d) 334 at 338 (C.A.). Compensation for the period of reasonable notice is not limited to severance pay in lieu of salary. As stated above, it extends to actual monetary loss sustained from deprival of fringe benefits that would otherwise have been enjoyed during the notice period.

On appeal the British Columbia Court of Appeal affirmed the trial judge's assessment of liability at (1992), 41 C.C.E.L. 72 (B.C.C.A.), but held that the appropriate measure of damages was the loss of the income stream from the disability benefits reduced to whatever extent was necessary to take into account the plaintiff's likelihood of recovery and his life expectancy.

The Ontario Court of Appeal dealt with this issue in Brito v. Canac Kitchens, 2012 ONCA 61.

Mr. Brito worked for Canac Kitchens as a cabinet maker for 24 years when he was terminated without just cause and provided with only his minimum statutory entitlement of 32 weeks’ pay. Following Mr. Brito’s termination, but during what the court found to be the reasonable notice period Mr. Brito was diagnosed with cancer and became disable.

The trial judge ordered the company to pay Mr. Brito the disability benefits he would have received had the company not cancelled his long-term disability coverage during the notice period. He also ordered the company to pay an additional $15,000 in punitive damages to Mr. Brito because of its “hardball approach”.

The trial judge criticized the approach of the company and made the following comments:

Canac consciously chose not to make alternative arrangements to provide its loyal, long-service employee with replacement disability coverage. Rather, it chose to go the “bare minimum” route. It provided only the statutory minimums in pay and benefits and then gambled that he would get another job and stay well. When it lost that gamble, it chose to litigate this matter for over five years. When confronted with its potential significant exposure, it raised the argument that Mr. Luis Romero Olguin failed to mitigate his potential damages by purchasing a replacement disability policy.

I reject that argument. This onus is upon Canac to establish the Plaintiff’s failure to mitigate. Canac has failed to do so in this instance. Insufficient evidence was led to show that comparable coverage would have been available and would have provide Mr. Luis Romero Olguin with comparable coverage.

The Ontario Court of Appeal upheld the award except for the award of punitive damages because it had not been pleaded.

2. Misrepresentation by Employer of Employee Benefits

Employers have an obligation to describe the extent of employee benefit coverage accurately. Employer liability can occur either in situations where the benefits summary booklet inaccurately describes the terms of the benefit policies from the insurance company, or, where an employer misrepresents the nature of benefits in an offer of employment or a contract of employment. An employee has a claim for the benefit coverage stated in the contract regardless of the terms of the actual benefits policy. If the terms of the policy are not the same as those represented by the employer, the employer may face liability for the coverage described in the contract of employment

The case of Deraps v Labourer’s Pension Fund of Central and Eastern Canada, [1999] OJ No. 3281 is an interesting example of this principle. The union maintained a pension fund for its members. Mrs. Deraps, the wife of a union member signed a waiver whereby she waived all rights to spousal pension benefits after her husband’s death. After her husband’s death, Mrs. Deraps sued the pension plan claiming that no one had explained the waiver to her and that she did not understand the consequences of signing it. The court found that the plan’s advisor owed a duty of care to Mrs. Deraps to provide her with “complete and clear information”. It awarded Mrs. Deraps damages equal to the amount of pension income she would have received had she not signed the waiver.

3. Failure to Pay Premiums

An employer's failure to pay premiums for benefit coverage may lead to liability far in excess of the value of those premiums. Once an employer has represented to its employees that it is providing certain benefit programs, those programs must be provided. If they are cancelled because of the employer's failure to pay premiums, an employee may have a claim against the employer for all of the benefits it would have received had that premium been paid. Again, in cases of serious disability, these claims can be enormous.

4. Liability for Misrepresentations, Errors and Omissions in Administering Benefit Policies

Employers often act as administrators of benefit policies on behalf of insurance companies. In this respect, they are acting as agents for the insurers. Employers often deliver policy booklets to employees, assist in completion of application and claim forms and collect premiums on behalf of the insurance company.

Insurers and employees may be jointly and severally liable for any errors or omissions that occur in the administration of benefit plans.

Traditionally, insurers could only recover a small amount from employers who were negligent in the administration of benefit plans. Recovery in such cases was limited to the premiums that the insurer had not been paid. This rule was changed in Pittman v. Manufacturers Life Insurance Company (1990), 48 CCLI 25 (Nfld. C.A.). Mr. Pittman applied for optional group life insurance for his wife through his employer. It was his employer's responsibility to receive such applications on behalf of the insurer. The employer lost the application and never forwarded it to the insurance company. When Mr. Pittman's wife died, he brought a claim for payment under the policy. The Newfoundland Court of Appeal awarded judgment to Mr. Pittman. The court found that the insurance company would have accepted the application if it had received it. As the insurer had made the employer its agent for the purpose of receiving the application, the insurer and the employer were liable.

The law now allows insurers to claim indemnification from employers in these situations. Conceivably the whole of the loss could not fall upon the employer depending upon which party (the insurer or the employer) was at fault.

In Grams v. Maple Leaf Metal Industries 2006 ABQB 146, an employer was found liable when it did not adequately warn an employee of the consequences of failing to apply for group benefits.

The case involved the death of a twenty-two year old employee. At the time of his hire he was advised that as an employee he was eligible for coverage under the group benefit plan. There was a 3 month waiting period before employees were eligible to apply for benefits.

The employee did not enroll in the benefits plan until 7 months after he was hired. The day after he completed the enrolment form he was killed in a workplace accident. The insurance company refused to honour his parents’ claim for life insurance benefits based upon a term in the policy which provided that if the employee did not apply for group benefits within 4 months of becoming eligible, he was required to provide evidence of insurability in order to be eligible for coverage.

The court found the company and the deceased employee were each 50% responsible for the loss.

With respect to the company the court held that it owed a duty of care to the employee and his parents (the beneficiaries) to give the employee adequate, timely information regarding the group policy, the proper enrolment and the proper administration of the policy. The court found that the company breached its duty of care in failing to advise the employee of the consequences of applying for benefits late.

In Bryan v. Crown Life Insurance Co. 2004 CarswellOnt 3709 (Ont. SC), an employee sued her employer for punitive, exemplary and aggravated damages when the employer missed the deadline for filing the employee’s applications for long-term disability benefits.

The action was dismissed because the employer admitted its error and made arrangements to pay the disabled employee the benefits she would otherwise have received. The court found that the employer acted in good faith and was not deserving of an award of damages against it.

5. Vested Rights

Cancellation of benefit plans can also raise a number of liability issues. The Supreme Court of Canada recently held in Re Dayco (Canada) Ltd. v. C.A.W. Canada (1993), 102 D.L.R. (4th) 609; (S.C.C.) that retirement benefits offered under a collective agreement vested in the employee at the time of retirement such that the employer could not cancel these benefits. The Supreme Court of Canada held that this was the case even though there was no longer a collective agreement in effect which provided for these rights.

As benefit costs rise, many employers are looking at ways of reducing benefits. In Lacey v. Weyerhaeuser, 2012 CarswellBC 1240, an employer advised its retired employees that they would now be expected to pay half the cost of their retiree benefit plan.

The court found that the right to employer paid retiree benefits had vested. It ordered the employer to continue to provide them.

Conversely, the court found no such obligation in Bennett v. British Columbia, 2012 BCCA 115 where legislation was enacted which required retirees of the Crown to pay a portion of their benefits. The court found that there were no vested rights to benefits. Rather there was merely a communication with employees of the retiree benefits available at the time of their retirement.

6. Ontario Human Rights Code

The Ontario Human Rights Code prohibits discrimination in employment based upon race, ancestry, place of origin, colour, ethnic origin, citizenship creed, sex, sexual orientation, gender identity, gender expression, age, record of offences, marital status, family status and disability.

There are a variety of cases involving claims for “same sex benefits”. An Ontario Board of Inquiry appointed under the Ontario Human Rights Code, found in Leshner v. Ontario (1992), 16 CHRRD/184 that the Ontario government had an obligation to provide same sex spousal benefits to its employees. The Board of Inquiry held that the Ontario Human Rights Code does “not permit or authorise discrimination in employment benefits, in this case pension benefits, against employees who are in a same sex conjugal relationship.” The Ontario Human Rights Code was recently amended to add “same-sex partnership status” to the prohibited grounds of discrimination. “Same-sex partnership status” is deferred to mean “the status of living with a person of the same sex in a conjugal relationship outside marriage”. This amendment will no doubt end the legal debate as to an employer’s obligation to provide “same sex spousal benefits”.

The eligibility requirements of benefits plans may also be found to be discriminatory. In Thornton v. North American Life Insurance (1992), 17 CHRRD/481 an employee was diagnosed by his doctor as being HIV positive, within the first 90 days of his employment. Six months later, he developed the symptoms of an AIDS related illness and was no longer able to work. The insurer denied the employee any LTD benefits on the basis that the insurance policy contained an exclusionary clause for pre-existing illnesses and illnesses for which the applicant received medical care within the first 90 days of employment. A Board of Inquiry appointed under the Human Rights Code found that the insurance company did not violate the Code and acknowledged that it would be uneconomical for an insurance company to be forced to provide coverage in this case. The employer was a small employer having fewer than 100 employees. The cost of providing LTD coverage to persons with pre-existing illnesses was prohibitive. However, one wonders what the result would have been if the employer had been a larger employer and wonders where the line is to be drawn.

As the cost of benefit coverage increases, many insurance companies and employers are looking at ways of controlling costs by limiting the type of benefit coverage provided. This is especially true in the case of drug plans. Increasingly these plans are limiting the types of drugs that will be paid for by the plan. While some “discrimination” is permitted upon an actuarial basis, great care must be taken to ensure that the scope of the limitations is not such as would give use to a claim of discrimination.

7. Fiduciary Obligations

Employers have also been found liable for failure to bring the terms of benefit policies to the attention of their employees.

In Card Estate v. John A. Robertson Mechanical Contractors (1985) Ltd. (1989), 26 CCEL 294, (Ont. H.C.) an employee was terminated without being told that his life insurance was terminated or that he had 31 days to convert the group policy to an individual policy. The court found that as a result the employer was liable to the employee's estate when he died during the notice period.

In the case of Tarailo et al v. Allied Chemical Canada Ltd. et al. (1989), 26 CCEL 2902; (Ont. H.C.), the court held an employer liable after it dismissed an employee who suffered from mental illness. The court found that the employer had grounds to dismiss the employee as he was incapable for performing his job. However, the court did find the employer was liable to the employee in negligence on the basis that it owed a duty to the employee to assist him in completing forms for LTD benefits. As a result, both the employer and the LTD carrier were held liable for the disability benefits the employee should have received but for the breach of duty.

The Ontario Court of Appeal expressed some doubt as to the extent of an employer’s duty under the Tarailo decision. In Beaird v Westinghouse Canada Inc. (1999), 41 C.C.E.L. (2d) 167, a disabled employee sued his former employer for its failure to assist him in obtaining long term disability benefits under a policy maintained by the company for its employees. In the end it was not necessary for the court to determine that issue. The court did, however, express a view on the Tarailo decision. It held that the real basis for liability in Tarailo was a contractual one based upon the language of the benefits booklet given to employees. The employer had undertaken to assist employees with their applications for disability insurance. As such, the employer became the agent of the group insurer for this limited purpose. The Court has left open the issue of whether an employer, absent a contractual term, owes a duty to its employees to support and assist in their claims under benefits policies.

8. Employment Standards Act, 2000

The Employment Standards Act, 2000 prohibits an employer from providing a benefit plan that differentiates, or makes any distinction, exclusion or preference between employees based on their age, sex, or marital status except in some limited cases where the differentiation has an actuarial basis.

This Act is enforced by the Ministry of Labour at no cost to the employee. The Director of Employment Standards is given the authority to refer any suspectd violation of this provision to the Ontario Labour Relations Board for determination. The Board in turn is given broad remedial powers in ensuring compliance with the Act.

Summary

As the relationship between employers and employees become more complex we can expect to see increasing obligations being placed upon employers towards their employees. In the field of employee benefits, employers are expected to administer the benefit plans fairly, accurately and efficiently. A failure to do so may lead to liability far in excess of the cost of providing the appropriate benefit coverage.



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